Freeloaders Unwelcome

Bank Director, 2nd Quarter 2011, by Naomi Snyder featuring Mary Beth Sullivan

With Congress wiping out billions in fee revenue, many banks are revamping their checking and savings accounts in a high-stakes bid to recover at least some of that lost income.

The Boston Consulting Group estimates that the U.S. banking industry will lose $25 billion in annual fee income as a result of regulatory changes that include the Credit Card Act of 2009, restrictions on overdraft fees in Regulation E, and the Durbin Amendment, which aims to cut interchange fees on debit cards.

With the regulatory shake-up amounting to a strip-down of bank fees, one way banks are coping is by rolling out more “relationship” products that reward profitable customers who buy multiple products and services, and giving a little nod goodbye to the money losers. With the indirect subsidy of overdraft and interchange fees now greatly reduced, checking and savings accounts must stand on their own profitability.

None of the top four largest banks in the country have free checking anymore.

Wells Fargo & Co. got rid of it in July of last year. The most basic account, called “value checking” now costs $5 per month, unless customers meet certain requirements such as direct deposit or an average daily balance of $1,500. All other accounts cross promote other Wells Fargo products, according to spokeswoman Richele Messick. Wells Fargo offers a bonus interest rate on its savings account for customers who also have a Complete Advantage checking account. As of early March in Massachusetts, that savings account bonus rate was a 15 basis point annual yield.

Citigroup Inc. also has begun offering more incentives to customers who buy multiple products or services. Last fall, the banking giant started giving customers free checking with no minimum balance if they did a combination of five transactions regularly, including direct deposit, to encourage customers to use Citigroup as their primary bank.

There’s nothing new about relationship banking, but banks are rolling out more incentives and tracking the profitability of accounts more closely, say consultants who are working with banks to revamp their deposit accounts.

Gone are the days when banks offered a mortgage discount to anyone with a checking account, which just led customers to open empty checking accounts, says James McCormick, president and founder of First Manhattan Consulting Group in New York.

To qualify for the new “platinum privileges” program, which Bank of America is piloting in three states and plans to roll out nationwide later this year, customers need to have $50,000 in a combination of linked accounts, such as checking, savings or an investment account at its Merrill Lynch & Co. subsidiary. In exchange, the bank promises certain perks, such as higher yields on CDs and money market accounts, plus expedited service on its toll-free line.

The pilot, which includes four different kinds of checking accounts, is in Georgia, Massachusetts and Arizona.

Such accounts are becoming more prevalent. As of January, 31 percent of all deposit products required multiple “relationships” with the bank, up from 28 percent in January of 2010, according to San Anselmo, California-based Market Rates Insight.

“We are seeing a shift from hot money to warm bodies,” says Dan Geller, executive vice president at the firm.

Regulation is not the only factor driving the move to relationship accounts; so is the renewed emphasis on building core deposits as a stable source of funding.

When there was a lot of lending going on, banks needed lots of deposits, and any deposits would do. With less lending activity nowadays, there is more pressure from regulators and investors for banks to build a base of customers who are going to stick around for a while, according to Andy Gibbs, a bank consultant with Mercer Capital in Memphis.

Regulators are looking askance at brokered deposits, wanting banks to beef up their core deposits from solid savings and checking account customers who won’t bolt for a higher CD offer elsewhere, Gibbs says.

But how can relationship accounts improve profitability?

JPMorgan Chase & Co. estimates the Durbin Amendment’s reduction in debit card fee income for banks will cost it $1.3 billion and make about 1.3 million of its customer households unprofitable.

So it has been making changes.

JPMorgan’s Charlie Scharf, retail financial services chief executive officer, said during an investor day conference in February that the bank converted about eight million free checking customers to a fee account, stopped offering debit rewards, and eliminated debit usage was a way to waive the monthly fee for new customers. Scharf estimated that about 15 percent of the bank’s customers are in less affluent households who will no longer qualify for free checking.

However, relationship banking pays, he said. A JPMorgan customer with both a checking account and a mortgage is about 30 percent more valuable to the bank than a checking customer without a mortgage, and also 54 percent less likely to close the checking account.

This is the kind of focus on profitability we haven’t seen the last 10 years, when banks were more focused on volume, says Mary Beth Sullivan, a managing partner at Capital Performance Group in Washington, D.C., a bank consulting firm.

“The banks always talked about relationships and how important they were but didn’t make it clear to the customers how they benefited from that,” she says.

Banks are restructuring deposit accounts to reflect the new emphasis on relationships, but each bank is experimenting with different accounts, says McCormick. That is different from the last 20 years when almost all banks had a free checking account model that relied on overdraft fees for income, he says.

“A big question is what will resonate with customers more?’’ says First Manhattan vice president Andrew Frisbie. “The industry has a great experiment underway and it will be really interesting to find out what happens with it.”